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  • Writer's picturePatrick Aloisio

Price vs Value: How Do You Value Something Like Bitcoin?

Originally posted on Twitter, you can view the full thread on Twitter here

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The price of Bitcoin has been skyrocketing lately, and will probably keep it up for the near future... You might wonder how the price is getting so high? How do you value something? There's nothing behind Bitcoin, shouldn't it be worthless? 👇 Here's the best explanation:


1/ The old saying goes something like "the price is what the market says it is." I think that's true, but there's much more to it. And we have to separate the difference of Value vs Price. Do you know the difference?


2/ Value: let's define as something's worth to a person. Or the utility they get out of the item. Price: is the amount of money the market is saying the item should be exchanged for.

price vs value

3/ Example: My favorite food is Salmon, absolutely love it! Will gladly pay $20 at a restaurant for it since it gives me a ton of happiness. My friend is allergic to fish, so clearly hates salmon. The price is still $20 at the restaurant, but he would get 0 value if he bought it.


4/ Price = $20 for both of us. Value = Greater than $20 for me, $0 for my friend. (In the econ world, value is often called "utils" to quantify your utility gained). Make sense so far? Ok let's dive deeper...

5/ Econ 101 uses supply & demand to find the equilibrium point for the price. As supply goes up, price will go down since there's more competition between sellers of the product. On the flipside, as demand goes up, so will the price since there's more competition between buyers.

supply and demand

6/ KEEP IN MIND THIS IS STILL FOR PRICE, NOT VALUE.


7/ For VALUE: Some things have their value derived from physical utility. Take wood or lumber. You can build a house for shelter, you can make furniture or paper; it has tons of use cases. So its price should be millions of dollars right? It gives value to users in the trillions!


8/ Well there's more to it... The demand is super high for wood, BUT remember there's another side to the equation, which is supply. Wood quite literally grows on trees. So the supply is also super high. Millions of miles worth across the globe.


9/ If a supplier charged you $1000 per foot, other suppliers would quickly come in and undercut the price since it's relatively low cost and easy to provide. Price fluctuates up and down from the supply and demand also fluctuating until the market price reaches an equilibrium.

supply and demand

10/ Understanding the concept behind pricing & valuing physical products with utility, such as wood, is relatively straightforward and easy. HERE'S THE CATCH: It gets more difficult to price something when it's for things more arbitrary in value. Value PERCEIVED vs TANGIBLE.


11/ Let's go to the world of art. Yes, you can decorate with art and can be a physical piece, but there's really no other use case for it. The value is strictly from your perceived enjoyment, as opposed to tangible usefulness. The VALUE is in the eye of the beholder.


12/ This Rothko painting sold for $87 million! I appreciate and love art, but the fact this sold for $87 million is crazy. A classroom of 3rd graders could remake this piece. But some rich guy decided he wanted it for reasons of arbitrary value like status. Or just because he could!

art price

13/ Lumber (Physical utility) = Super applicable, demand very high, market size is the entire world, been around forever. Art (Intangible utility) = Only one application, much smaller market size, constantly changing and very trendy.


14/ Now to come full circle, how is the value and price justified for Bitcoin when there's nothing backing its value like a government guarantee (USD) or gold? Do you think bitcoin's value is arbitrary like the art example? You're wrong. It's much more like the wood example:

15/ People incorrectly lump Bitcoin in with art, tulips, Ponzi schemes, and others. Here's why there's tremendous value in bitcoin even though it is not physical: Bitcoin's utility is still tangible. What is bitcoin's utility?


16/ 1. Cheap transactions - Someone moved $1 billion of Bitcoin recently and paid a $1.75 transaction fee. Wire transfers for 0.01% of that amount would cost 25 times as much... The security and transport costs for gold would be astronomical.

bitcoin price

17/ 2. Open 24/7 365 days - That same expensive wire transfer you just did at your bank? Oh yeah, make sure you get it done between 9-5pm only Mondays through Fridays... And don't even think about sending it on holidays. Bitcoin, like my football career as a WR, is always open.


18/ 3. Fast settlement of transactions - I bought a house this year and the wire transfer took 3 hours! With Bitcoin, the transaction goes through instantaneously and gets settled in only about 10 mins. (Settled means confirmed it's not fraudulent).


19/ 4. Self-custody - I can very easily withdraw, deposit or move funds without needing it to be cleared or approved by some 3rd-party. I can bring billions of dollars of Bitcoin (I wish this wasn't hypothetical) anywhere with me without it being flagged by anyone.


20/ 5. Decentralized - There is no centralized government, company, bank, or person that controls the rules and protocols of the network. Transactions are permanently recorded and viewable to anyone. There's no Fed that can magically print more whenever they want.

money supply

21/ Bitcoin itself might be intangible, but you can tangibly measure how much people value Bitcoin's characteristics from above. The evidence is shown in the network...


22/ There are more than 80 million unique bitcoin wallet addresses. This means that the existing market of buyers and sellers of 80 million+ currently have reached an equilibrium at the price of ~$67k. (Just like my Econ 101 price equilibrium example earlier).


23/ This isn't one random rich guy deciding to spend millions on a useless painting and setting the market price himself. This is a massive network that is constantly getting strengthened and validated every single day and GROWING.

bitcoin price

24/ There was $39 Billion in BTC that settled in the network in just the last 24 hours. AND You can see I am not alone in saying I greatly value those attributes listed above. The space itself is growing faster than the internet was in the 90s!

bitcoin adoption rate

25/ In other words, the consensus of the entire network is that BTC is worth at least $67k and a market cap of ~$1.3 Trillion. By population that's the equivalent to what would be the 20th largest country, or by GDP that's about the 17th biggest economy.


26/ Imagine how dumb I would sound if I said, "Oh yeah Mexico? Nah, that country is a scam."


27/ World renowned smart people of Tesla, SpaceX, PayPal, Twitter, Square, and Apple: Elon Musk, yes to Bitcoin Tim Cook, yes to Bitcoin Jack Dorsey, yes to Bitcoin Peter Thiel, yes to Bitcoin Imagine not thinking Bitcoin might be worth looking into...


28/ The current option is USD and traditional banks, and they aren't fully satisfying the market's needs and wants. Inflation issues, accessibility & ownership issues, seizure issues, the list goes on... People are looking elsewhere and finding the solution is Bitcoin


29/ The exciting part is when you do realize that there is tangible value in the network, the fact we are still so early, that's when you'll also start to realize the price today is a fraction of what the value truly is...


30/ It's not a matter of if, but a matter of when...


31/ Hopefully this thread helped give you some insight on Price vs Value! Make sure you do your own research. If you thought this thread was interesting or helpful, follow me @Patrick_Aloisio for more threads like this.

bitcoin price
 

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